Venture Corporation - Maybank Kim Eng 2019-01-07: Still Resilient

Venture Corporation - Still Resilient

Most resilient to US-China trade war

Maintain BUY albeit with a lower ROE-g/COE-g Target Price of SGD17.48, as

we proactively lower FY18-20E EPS by 2-9% for macroeconomic uncertainties; and

increase COE from 7.1% to 8% to factor in increased volatility.

We continue to believe its Southeast-Asian production footprint, rising R&D, and customer & end-market diversity could cushion effects of the US-China trade war and/or a potential downturn in US capex spending.

Stronger than expected pace of recovery and/or dividends could be catalysts.

Growing headwinds

Many of VENTURE CORPORATION LIMITED (SGX:V03)’s customers are US-based. Recent softening of manufacturing indicators both globally and in the US may heighten end-market caution in the coming quarters. This may temper the pace of Venture Corp’ sequential earnings recovery.

That said, Venture Corp still believes its recovery will be underpinned by a production ramp-up of a broad base of new products in its TMO and N&C segments.

Fundamentals still strong

Although sentiment on the stock may be negative in the near term due to macro uncertainties, we believe:

Venture Corp is a potential beneficiary of the US-China trade war, given its sizeable production out of Singapore and Malaysia,

exponential rise in R&D since 3Q16, which is expected to underpin future revenue growth, and

strength in end-markets for test & measurement, medical and life-sciences, from policy-related spending.

This could cushion a potential downturn in US corporate spending.

Dividend yields intact

Our Target Price is now based on 2x FY19E P/BV, from 2.5x previously. It implies 14.4x FY19E P/E, just slightly below its 14-year mean of 15.3x.

Strong cash generation should continue to support dividend yields, in our view.

Earnings Revisions

We cut FY18-20E EPS by 2-9%, as Venture Corp’s sequential earnings recovery in 4Q18-2019 could be potentially tempered by lower capex appetite in the US due to end-market caution. Aside, manufacturing activity in Malaysia and Singapore, which account for a combined 80% of Venture Corp’s production, is contracting. The Nikkei Malaysia Manufacturing Dec 2018 PMI hit 46.8, its lowest in 6.5 years while Singapore’s electronics PMI was 49.8 in Dec 2018.

Amid macro uncertainties, we see resilience from:

New products. Venture Corp’s sequential recovery should be underpinned by a gradual ramp-up of a broad base of new products in its TMO and N&C segments. Their value-add should be higher than previous generations, given increased R&D involvement in recent years.

Customer growth. Consensus still expects sales of Venture Corp’s well-known customers to increase by 4-5% in 2019-20. While consensus revenue-growth expectations for these customers have been tempered over the past six months, their cuts have not been material.

Diversified end-markets. In the TMO segment (57% of FY17 revenue), there remain pockets of end-market strength. Agilent, Thermo Fisher, Keysight and Illumina delivered strong results in latest quarterly earnings in part due to spending by governments / academia and on 5G infrastructure. Strong growth from China has been a consistent theme.

Potential benefits of US-China trade war. China makes up only 15% of Venture Corp’s production. We think Venture Corp could benefit from customers routing their production away from China.

Valuation

Our ROE-g/COE-g Target Price is now based on 2x FY19E P/BV, from 2.5x previously. This is largely because we have increased our beta from 0.7x to 0.85x to capture increased volatility of the stock following heightened macro uncertainties.

Our new Target Price implies 14.4x FY19E P/E, just slightly below its 14-year average of 15.3x.

We do not think current valuations of 1SD below its 14-year P/E mean are warranted, as valuations of this level in the past reflected

pricing pressure (1Q06),

severe demand weakness (1H08-1H09, 4Q11) or

a marked decline in the USD vs SGD (9M11).

Presently, we do not see such threats materialising.

We also continue to expect 2019-20E FCF of above SGD1/share, which should comfortably support DPS.

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